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I did my vehicle engine rebuild in authorized service center varun motors Hyderabad . After service I noticed that milage drop to 12Km per Lt with A/C,Earlier it was around 18km in city. I asked to the service manager, he is saying that, you have run your vehicle at least 5k km so that you will get good mileage, we rechecked everything is good. Do I need to wait for 5k km to get good mileage??? Please help me on this.

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tl dr: Yes, you'll most likely see reduced mileage.

When an engine is rebuilt (or built new, for that matter), everything in it is tight. The clearances between bearings and journal surfaces are of really close tolerances. Rings which seal in the cylinder bores are running over rough surfaces. After a while, everything starts running and playing together as they should. This is called the break-in period. You will see reduced mileage during this period. It will gradually go up. It may or may not get to where it was, but then again, it may exceed the original mileage altogether. That depends on the attention to detail which was put into the rebuild.

If the shop told you 5kkm, that is about the right amount of mileage. Something they should have also told you was to do an oil & filter change about 1kkm. This will get most all the break-in materials which are present at the time of the oil change out of the system. This will ensure they are not causing adverse wear on your fresh rebuild.

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